1. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Managerial Economics in a Global Economy Chapter 9 Market Structure: Perfect Competition, Monopoly and Monopolistic Competition

2. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Structure Perfect Competition Monopolistic Competition Oligopoly Monopoly More Competitive Less Competitive

3. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition Many buyers and sellers Buyers and sellers are price takers Product is homogeneous Perfect mobility of resources Economic agents have perfect knowledge Example: Stock Market

4. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopolistic Competition Many sellers and buyers Differentiated product Perfect mobility of resources Example: Fast-food outlets

5. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Oligopoly Few sellers and many buyers Product may be homogeneous or differentiated Barriers to resource mobility Example: Automobile manufacturers

6. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly Single seller and many buyers No close substitutes for product Significant barriers to resource mobility –Control of an essential input –Patents or copyrights –Economies of scale: Natural monopoly –Government franchise: Post office

7. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Price Determination

8. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Price Determination

9. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Short-Run Equilibrium Firm’s Demand Curve = Market Price = Marginal Revenue Firm’s Supply Curve = Marginal Cost where Marginal Cost > Average Variable Cost

10. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Short-Run Equilibrium

11. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Long-Run Equilibrium Price = Marginal Cost = Average Total Cost Quantity is set by the firm so that short-run: At the same quantity, long-run: Price = Marginal Cost = Average Cost Economic Profit = 0

12. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Competition: Long-Run Equilibrium

13. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition in the Global Economy Domestic Supply Domestic Demand World Supply

14. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition in the Global Economy Foreign Exchange Rate –Price of a foreign currency in terms of the domestic currency Depreciation of the Domestic Currency –Increase in the price of a foreign currency relative to the domestic currency Appreciation of the Domestic Currency –Decrease in the price of a foreign currency relative to the domestic currency

15. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition in the Global Economy Demand for Pounds Supply of Pounds R = Exchange Rate = Dollar Price of Pounds

16. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly Single seller that produces a product with no close substitutes Sources of Monopoly –Control of an essential input to a product –Patents or copyrights –Economies of scale: Natural monopoly –Government franchise: Post office

17. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly Short-Run Equilibrium Demand curve for the firm is the market demand curve Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR) Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output

18. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly Short-Run Equilibrium Q* = 500 P* = $11

19. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly Long-Run Equilibrium Q* = 700 P* = $9

20. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Social Cost of Monopoly

21. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopolistic Competition Many sellers of differentiated (similar but not identical) products Limited monopoly power Downward-sloping demand curve Increase in market share by competitors causes decrease in demand for the firm’s product

22. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopolistic Competition Short-Run Equilibrium

23. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopolistic Competition Long-Run Equilibrium Profit = 0

24. PowerPoint Slides by Robert F. BrookerHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopolistic Competition Long-Run Equilibrium Cost without selling expenses Cost with selling expenses